Why is investment in seed-stage startups decreasing?

By Madhvi Mavadiya | 8 December 2015

Figures for 2015 reveal that the number of Initial Public Offerings (IPOs) for technology companies has dropped by 43%, according to financial software company Dealogic. This has resulted in a number of venture capital investors retreating from a focus on seed-stage startups as there is more business growth to be found when investing in startups that are more established.  

Google Ventures, the venture arm, part of the recently renamed Alphabet Inc., has reacted in this way and no longer sees the worth of funding seed deals. President and chief executive, Bill Maris, believes that this part of the venture market is overheated, according to the Wall Street Journal. “We’ve moved away from seed-stage investing. I think there’s less opportunity here.”

To be renamed as GV this week, Google Ventures invested 20% less in 2015 than 2014, despite the amount of capital saved for investing in startups being larger. 57 companies were supported by the venture firm last year and that number fell to 34 this year, according to the Financial Times.

The Wall Street Journal explains how a small deal can cause problems and inhibit growth, rather than encourage it. Those deals that are not followed up by a larger deal after an IPO can present the wrong idea to the marketplace and an example is made of Andreessen Horowitz, the venture capital firm that, like Google Ventures, stepped away from making smaller deals in 2013.

Alongside this, founder of multiple startups, Kevin Rose, who was responsible for seed investing at Google Ventures, stepped down to focus on running his startup.

On the other hand, for those startups that are established, Maris senses that there is a reluctance to go public. “I’m seeing actual companies that are, for reasons that are hard for me to understand, resisting to go public with all they’ve got. The IPO market has been, at least for us, relatively quiet, it’s been a very choppy exit market this year. They would benefit from the rigor and discipline that the public market requires.”

Although, some startups like Airbnb and Uber, that have become a part of our day to day lives, remained private, which resulted in successive rounds of investments of larger amounts, but Maris did not see the logic in this. “They’re setting the bar so inordinately high they’re making life difficult for themselves. There’s going to be some fallout: some of them will lost a lot of money,” Maris said in an interview with the FT.

During 2015, Google Ventures prioritised 31% of its total capital for organisations that specialised in health care and life sciences, according to the WSJ, but this is a slight decrease from 36% funded in 2014. Regardless of this, Google Ventures invested 24% of its capital in consumer startups in 2015, up from 8% in 2014. “I don’t think there’s a lot of meaning in that. Percentages move around,” Maris dismissed the figure.

More than 300 startups have been backed by the investment unit, which has meant that the investor has become one of the most active in Silicon Valley, especially after funding into ride-hailing application Uber and the acquiring of smart home startup Nest for $3.2 billion.

The FT also reported how Google Ventures may increase the rate of investment by stopping running separate funds for overseas investing which would provide more flexibility. This decision was made only 18 months after the first international fund was set up with the intention of dedicating $125 million to European ventures.

Only six investments were made with this pool and according to the FT, Maris denied the fact that this was a disappointing result, despite not reaching financial targets. Startups that began in the private sphere have become more aware of risk recently as the US interest rate rise continues to loom over the business sector.

“There’s less money, more fear, more caution,” Maris said. 

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